The U.S. Commerce Department is set to place export restrictions on Chinese telecoms equipment maker ZTE Corp (
000063.SZ) for alleged violations of U.S. export controls on Iran, according to documents seen by Reuters.
The
restrictions will make it difficult for the company to acquire U.S.
products by requiring ZTE's suppliers to apply for an export license
before shipping any American-made equipment or parts to ZTE. According
to a Commerce Department notice that will be published next week in the
U.S. Federal Register, the license applications generally will be
denied.
The restrictions
will take effect Tuesday, Reuters has learned, and apply to any company
worldwide that wants to ship American-made products to ZTE Corp in
China. Those companies are not the target of the export curbs on ZTE.
"This
is a significant new burden on trade with ZTE," a senior official at
the Commerce Department told Reuters. The official declined to comment
on whether the U.S. government might take further action against ZTE.
The company can appeal against the action.
ZTE,
based in the southern Chinese boomtown of Shenzhen, said in a statement
on Sunday that it was aware of media reports on U.S. export
restrictions.
"ZTE is highly
concerned about recent media reports relating to a U.S. Department of
Commerce investigation," the company said. "ZTE has been working with
associated U.S. government departments on investigations since 2012 and
maintains constant communication with associated departments and is
committed to fully address and resolve any concerns."
Trade
in shares in ZTE, which also sells consumer electronic devices such as
smartphones in the United States, was suspended on Monday in Hong Kong
and Shenzhen. The company did not offer an explanation.
"We
believe the restrictions, if implemented, will cause significant supply
problems to ZTE," Jefferies analyst Cynthia Meng wrote in a note,
adding that ZTE has major trading relationships with several U.S.
companies including Qualcomm (
QCOM.O), Microsoft (
MSFT.O) and IBM (
IBM.N).
Telecoms
equipment and terminal businesses combined account for 80 percent of
ZTE's total revenue of 2015, Meng said. The company's revenue for last
year was expected to rise 23.8 percent to a record high of 100.8 billion
yuan ($15.47 billion), preliminary results showed.
ALLEGED VIOLATIONS
The
Commerce Department investigated ZTE for alleged export-control
violations following reports by Reuters in 2012 that the company had
signed contracts to ship millions of dollars worth of hardware and
software from some of America's best-known technology companies to
Iran's largest telecoms carrier, Telecommunication Co of Iran (TCI), and
a unit of the consortium that controls it.
The U.S. companies, which included Microsoft Corp (
MSFT.O), IBM (
IBM.N), Oracle Corp (
ORCL.N)
and Dell Inc [DI.UL], have all said they were not aware of the Iranian
contracts. It is not clear if any of the companies still do business
with ZTE.
Washington has long
banned the sale of United States-made technology products to Iran. The
Commerce Department's investigation focused on whether ZTE had acquired
American products through front companies and then shipped them to Iran
in violation of U.S. sanctions.
Commerce
Department investigators obtained internal ZTE documents - some of
which had been marked by the company as "Top Secret" - outlining an
alleged sanctions-busting scheme. Reuters reviewed some of the
documents.
The senior Commerce Department official declined to comment on whether ZTE had implemented that scheme.
The ZTE statement did not provide comment relating to the documents.
The
day after the first Reuters article was published in March 2012, a ZTE
spokesman said the company would "curtail" its business in Iran. The
company later issued a statement saying: "ZTE no longer seeks new
customers in Iran and limits business activities with existing
customers."
BUSINESS IMPACT
What effect the new export restrictions will have on ZTE's global business is not clear.
One
undated internal ZTE document obtained by Commerce Department
investigators and reviewed by Reuters states: "Our company has many
technologies and components that came from suppliers in the U.S ... Lots
of chips or software used in the products of our company are from U.S.
suppliers."
One of ZTE's websites also states that several leading U.S. technology companies, including Microsoft, Intel Corp (
INTC.O), IBM and Honeywell International Inc (
HON.N), are "key strategic partners of ZTE". The terms of the partnerships are not described.
A
spokeswoman for Microsoft said the company had a licensing agreement
with ZTE but could not confirm if the Chinese company purchases other
products, such as software. The other U.S. companies did not respond
immediately to requests comment.
The
undated internal ZTE document also describes a proposal overseen by the
company's legal department that describes ways to export American
products subject to U.S. sanctions by using shell companies to avoid
getting caught.
"The biggest
advantage" of one method is that it will make it "harder for the U.S.
government to trace it or investigate the real flow of the controlled
commodities", the document states.
In
its planned action against ZTE, the Commerce Department cites the
proposal, stating that the company "planned and organized a scheme to
establish, control and use a series of 'detached' companies to illicitly
re-export controlled items to Iran in violation of U.S. export control
laws". It is not clear if the alleged scheme was implemented.
'TOP SECRET'
Another
internal ZTE document from August 2011 that discusses "U.S. export
control risks" facing the company allegedly was signed by several top
ZTE officials, including Shi Lirong, its president.
The
document, marked by the company "Top Secret" and "No spreading abroad
without permission of ZTE", begins "Dear company leaders".
It
states that ZTE "has ongoing projects in all five major embargoed
countries - Iran, Sudan, North Korea, Syria and Cuba", adding that "all
of these projects depend on U.S.-procured items to some extent, so
export control obstacles have arisen".
The document goes on to cite "other risks" to ZTE, including its operations in the United States.
"R&D
employees at the U.S. Research Centers often travel between China and
the U.S., carrying R&D data," it states, in an apparent reference to
research and development. "This already severely violates the law."
The document does not specify what law may have been violated.
The
company "needs to take preventative measures immediately, otherwise
will face the risk of being investigated anytime", the document states.
The
document also states that ZTE's Iran project "can potentially put us at
risk of being put on the Blacklist by the U.S.," and that such an
eventuality could leave the company facing "the risk of losing the
supply chain of U.S. products".
ZTE
Corp is one of the world's largest telecoms equipment makers with
operations in 160 countries, according to its website. It also is a
major manufacturer of mobile handsets. Founded in 1985, its shares trade
on both the Hong Kong and Shenzhen stock markets.
Besides
ZTE, the export curbs will apply to two of its Chinese affiliates, ZTE
Kangxun Telecommunications Ltd and Beijing 8-Star, and an Iranian
company, ZTE Parsian.
